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Foundations of Financial Management (10248)-Test: Final Exam - Fall 1, 2013 Questions

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Question;Test: Final Exam - Fall 1, 2013 QuestionsFoundations of;Financial Management (10248) -;Test: Final Exam - Fall 1, 2013 Questions;Which of the following statements is CORRECT?;a. Call options generally sell at a price greater than their;exercise value, and the greater the exercise value, the higher the premium;on the option is likely to be.;b. Call options generally sell at a price below their;exercise value, and the lower the exercise value, the lower the premium on;the option is likely to be.;c. Call options generally sell at a price below their;exercise value, and the greater the exercise value, the lower the premium;on the option is likely to be.;d. If;the underlying stock does not pay a dividend, it does not make good;economic sense to exercise a call option prior to its expiration date, even;if this would yield an immediate profit.;e. Because of the put-call parity relationship, under;equilibrium conditions a put option on a stock must sell at exactly the;same price as a call option on the stock.;Which of the following statements is CORRECT?;a. Only institutions, and not individuals, can participate;in derivatives market transactions.;b. As;they are generally defined, money market transactions involve debt;securities with maturities of less than one year.;c. The IPO market is a subset of the secondary market.;d. If Disney issues additional shares of common stock;through an investment banker, this would be a secondary market transaction.;e. If you purchased 100 shares of Disney stock from your;brother-in-law, this would be an example of a primary market transaction.;Which of the following statements best describes what you should;expect if yourandomlyselect stocks and add them to your portfolio?;a. Adding more such stocks will reduce the portfolio's beta;coefficient and thus its systematic risk.;b. Adding;more such stocks will reduce the portfolio's unsystematic, or;diversifiable, risk.;c. Adding more such stocks will increase the portfolio's;expected rate of return.;d. Adding more such stocks will reduce the portfolio's;market risk but not its unsystematic risk.;e. Adding more such stocks will have no effect on the;portfolio's risk.;Which of the following statements is CORRECT?;a. Corporations cannot buy the preferred stocks of other;corporations.;b. The;preferred stock of a given firm is generally less risky to investors than;the same firm's common stock.;c. Preferred dividends are not generally cumulative.;d. Preferred stockholders have a priority over bondholders;in the event of bankruptcy to the income, but not to the proceeds in a;liquidation.;e. A big advantage of preferred stock is that dividends on;preferred stocks are tax deductible by the issuing corporation.;Which of the following statements is CORRECT?;a. The market value of a bond will always approach its par;value as its maturity date approaches. This holds true even if the firm has;filed for bankruptcy.;b. The yield to maturity for a coupon bond that sells at a;premium consists entirely of a positive capital gains yield, it has a zero;current interest yield.;c. On an expected yield basis, the expected capital gains;yield will always be positive because an investor would not purchase a bond;with an expected capital loss.;d. The;yield to maturity on a coupon bond that sells at its par value consists;entirely of a current interest yield, it has a zero expected capital gains yield.;e. Rising inflation makes the actual yield to maturity on a;bond greater than a quoted yield to maturity that is based on market;prices.;Which of the following statements regarding a 15-year;(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and;transactions costs.);a. The remaining balance after three years will be $125,000;less one third of the interest paid during the first three years.;b. Because;it is a fixed-rate mortgage, the monthly loan payments (which include both;interest and principal payments) are constant.;c. Interest payments on the mortgage will increase steadily;over time, but the total amount of each payment will remain constant.;d. The proportion of the monthly payment that goes towards;repayment of principal will be lower 10 years from now than it will be the;first year.;e. The outstanding balance declines at a slower rate in the;later years of the loan's life.;Which of the following statements is CORRECT?;a. Hedge funds are legal in the United States, but they are;not permitted to operate in Europe or Asia.;b. Hedge funds are legal in Europe and Asia, but they are;not permitted to operate in the United States.;c. The;justification for the "light" regulation of hedge funds is that;only "sophisticated" investors with high net worths and high;incomes are permitted to invest in these funds, and such investors;supposedly can do the necessary "due diligence" on their own;rather than have it done by the SEC or some other regulator.;d. Hedge funds have more in common with commercial banks;than with any other type of financial institution.;e. Hedge funds have more in common with investment banks;than with any other type of financial institution;Companies E and P each reported the same earnings per share;(EPS), but Company E's stock trades at a higher price. Which of the following statements;is CORRECT?;a. Company E must have a higher market-to-book ratio.;b. Company E is probably judged by investors to be riskier.;c. Company E must pay a lower dividend.;d. Company;E trades at a higher P/E ratio.;e. Company E probably has fewer growth;opportunities.;Other things held constant, the value of an option depends on;the stock's price, the risk-free rate, and the;a. Variability of the stock price.;b. Option's time to maturity.;c. Strike price.;d. All of these.;e. None of these.;Under normal conditions, which of;the following would be most likely to increase the coupon rate;required to enable a bond to be issued at par?;a. The rating agencies change the bond's rating from Baa to;Aaa.;b. Adding a sinking fund.;c. Adding additional restrictive covenants that limit;management's actions.;d. Adding;a call provision.;e. Making the bond a first mortgage bond rather than a;debenture.;A firm wants to strengthen its financial position. Which of the;following actions wouldincreaseits current ratio?;a. Use cash to increase inventory holdings.;b. Issue;new stock and then use some of the proceeds to purchase additional;inventory and hold the remainder as cash.;c. Reduce the company's days' sales outstanding to the;industry average and use the resulting cash savings to purchase plant and;equipment.;d. Borrow using short-term debt and use the proceeds to;repay debt that has a maturity of more than one year.;e. Use cash to repurchase some of the company's own stock.;Which of the following statements is CORRECT?;a. Long-term bonds have less interest rate price risk and;also less reinvestment rate risk than short-term bonds.;b. One advantage of a zero coupon Treasury bond is that no;one who owns the bond has to pay any taxes on it until it matures or is;sold.;c.;Relative to a coupon-bearing bond with the same maturity, a zero coupon;bond has more interest rate price risk but less reinvestment rate risk.;d. If interest rates increase, all bond prices will;increase, but the increase will be greater for bonds that have less;interest rate risk.;e. Long-term bonds have less interest rate price risk but;more reinvestment rate risk than short-term bonds.;Other things held constant, which of the following actions wouldincreasethe;amount of cash on a company's balance sheet?;a. The company repurchases common stock.;b. The company gives customers more time to pay their bills.;c. The;company issues new common stock.;d. The company purchases a new piece of equipment.;e. The company pays a dividend.;Which of the following statements is CORRECT?;a. Typically, a firm's EBIT should exceed its EBITDA.;b. If a firm is more profitable than most other firms, we;would normally expect to see its book value per share exceed its stock;price, especially after several years of high inflation.;c. Typically, a firm's DPS should exceed its EPS.;d. The more depreciation a firm has in a given year, the;higher its EPS, other things held constant.;e. If a firm is more;profitable than average (e.g., Google), we would normally expect to see its;stock price exceed its book value per share.Part 2Pearson;Brothers recently reported an EBITDA of $6.5 million and net income of $1.95;million. It had $2.34 million of interest expense, and its corporate tax rate;was 35%. What was its charge for depreciation and amortization?;$;Problem 4-22;Expected Rate of return;?;eBook;?;Washington-Pacific invests $4 million to buy a tract of land and;plant some young pine trees. The trees can be harvested in 15 years, at which;time W-P plans to sell the forest at an expected price of $8 million. What is;W-P's expected rate of return? Round your answer to two decimal places.;%;Problem 4-5;Number of Periods for an Annuity;?;eBook;?;You have $35,666.34 in a brokerage account, and you plan to;deposit an additional $4,000 at the end of every future year until your account;totals $450,000. You expect to earn 8.8% annually on the account. How many;years will it take to reach your goal? Round your answer to the nearest whole.;years;roblem 4-25;Repaying a Loan;?;eBook;?;While Mary Corens was a student at the University of Tennessee;she borrowed $12,000 in student loans at an annual interest rate of 10.80%. If;Mary repays $1,500 per year, how long (to the nearest year) will it take her to;repay the loan?;year(s);Problem 8-4;Put - Call Parity;?;eBook;?;The current price;of a stock is $36, and the annual risk-free rate is 3%. A call option with a;strike price of $32 and 1 year until expiration has a current value of $6.80.;What is the value of a put option written on the stock with the same exercise;price and expiration date as the call option? Round your answer to the nearest;cent.;$;roblem 5-5;Default Risk Premium;?;eBook;?;?;A Treasury bond that matures in 10 years has a yield of 3%. A;10-year corporate bond has a yield of 8%. Assume that the liquidity premium on;the corporate bond is 0.4%. What is the default risk premium on the corporate;bond? Round your answer to two decimal places.;%;Problem 7-1;DPS Calculation;?;eBook;?;Thress Industries just paid a dividend of $2.00 a share (i.e., D0= 2.00). The dividend is expected to grow 7% a year for the next;3 years and then at 11% a year thereafter. What is the expected dividend per;share for each of the next 5 years? Round your answers to the nearest cent.;a.;D1=;$;b.;D2=;$;c.;D3=;$;d.;D4=;$;e.;D5=;$;roblem 3-8;Profit Margin and Debt Ratio;?;eBook;?;?;Assume you are given the following relationships for the Clayton;Corporation;Sales/total assets;1.4;Return on assets (ROA);4%;Return on equity (ROE);5%;1.;Calculate Clayton's profit margin. Round your answer to two;decimal places.%;2.;Calculate Clayton's debt ratio. Round your answer to two decimal;places.%;Problem 6-11;Required Rate of Return;?;eBook;?;Stock R has a beta of 2.2, Stock S has a beta of 0.75, the;expected rate of return on an average stock is 13%, and the risk-free rate is;7%. By how much does the required return on the riskier stock exceed the;required return on the riskier stock exceed that on the less risky stock? Round;your answer to two decimal places.;%;Problem 4-2;Present Value of a Single Payment;?;eBook;?;What is the present value of a security that will pay $5,000 in;30 years if securities of equal risk pay 6.1% annually? Round your answer to;the nearest cent.;$;Problem 3-5;Price/Earnings Ratio;?;eBook;?;Needham Pharmaceuticals has a profit margin of 4% and an equity;multiplier of 2.1. Its sales are $90 million and it has total assets of $44;million. What is its ROE? Round your answer to two decimal places.;%;roblem 7-11;Nonconstant Growth Stock Valuation;?;eBook;?;Assume that the average firm in your company's industry is;expected to grow at a constant rate of 7% and that its dividend yield is 5%.;Your company is about as risky as the average firm in the industry, but it has;just successfully completed some R&D work that leads you to expect that its;earnings and dividends will grow at a rate of 50% [D1= D0(1 + g) = D0(1.50)] this year and 25%;the following year, after which growth should return to the 7% industry;average. If the last dividend paid (D0) was $1.5, what is the value;per share of your firm's stock? Round your answer to the nearest cent. Do not;round your intermediate computations.;$;Problem 7-8;Preferred Stock Rate of Return;?;eBook;?;What will be the nominal rate of return on a perpetual preferred;stock with a $100 par value, a stated dividend of 12% of par, and a current;market price of (a) $60, (b) $81, (c) $100, and (d) $139? Round the answers to;two decimal places.;a.?;b.?;c.?;d.;?;Problem 2-10;Cash Flows;?;eBook;?;?;The Moore Corporation had operating income (EBIT) of $550,000.;The company's depreciation expense is $165,000. Moore is 100% equity financed;and it faces a 40% tax rate.;1. What is;the company's net income?;$;2.;What is its net cash flow?;$;Problem 8-3;Black-Scholes Model;?;eBook;?;Assume you have been given the following information on Purcell;Industries;Current stock price = $18;Strike price of option = $12;Time to maturity of option = 4 months;Risk-free rate = 8%;Variance of stock return = 0.11;d1 = 0.24451;N(d1) = 0.40038;d2 = 0.0548;N(d2) = 0.49924;According to the Black-Scholes option pricing model, what is the;option's value? Round your answer to the nearest cent.;$;Problem 5-2;Yield to Maturity for Annual Payments;?;eBook;?;Wilson Wonders's;bonds have 7 years remaining to maturity. Interest is paid annually, the bonds;have a $1,000 par value, and the coupon interest rate is 9%. The bonds sell at;a price of $1,095. What is their yield to maturity? Round your answer to two;decimal places.;%;Problem 6-2;Required Rate of Return;?;eBook;?;Assume that the risk-free rate is 4% and that the expected;return on the market is 14%. What is the required rate of return on a stock;that has a beta of 1.3?;%;Problem 5-13;Yield to Maturity and Current Yield;?;eBook;?;You just purchased a bond that matures in 15 years. The bond has;a face value of $1,000 and has an 8% annual coupon. The bond has a current;yield of 8.37%. What is the bond's yield to maturity? Round your answer to two;decimal places.;%

 

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